Harold Demsetz, “Barriers to Entry.\"

· BTE concept is assumed to be valid without careful thought · We don’t ask where the barrier came from, if barrier is government that would harm consumers but if its earned consumers are better off. o BTE shouldn’t automatically be associated with monopoly power and consumer harm · Problems with knowing what IS and ISN’T a barrier to entry, experts don’t agree the definitions—then how are judges supposed to know? · BTE cant be tied easily to an objective way to measure it

· In std. competitive models, all firms are supposed to be at minimum AC and everyone’s at that point o Assumes everyone AC is the same; Demsetz, complex teams you can have higher AVERAGE rates of return but same MARGINAL rates of return § Higher profits doesn’t mean collusion

· New vs. old firms o When you test economic theories, you use accounting profits which isn’t the same as economics o Accounting purposed you can expense advertising and R&D as if they were earned this year but what if the benefit is supposed to last 10 years? § You should allocate the cost according to the benefit, amortize; however, you expense it because of taxes YOU WANT TO EXPENSE · Problem, new entrants expense everything this year so they’re attributing much higher costs this year but other firms have “costed” them in the PAST o Other problem, how are you supposed to depreciate factory? When is it going to be obsolete? o What about joint costs? Roasts and steaks. There are things we can’t measure accurately!

· He talks about whether prices are lower than THE minimum costs, assumes that everyone has the same costs (and that we have some way of knowing that) o Assume someone’s cost is $8 he can charge more than 8 and less than 10—people have different costs You should ask the CONSUMERS, ignore what consumers say their “costs” are because every competitive device people use helps consumers and harms rivals so you shouldn’t let rivals bring charges

· Difference is looking at the current situation by itself vs. looking at lifetime · You’ve gotten bigger, you’ve already gone through hurtles which gives you advantages over people entering if you’re JUST LOOKING AT TODAY · Stigler’s disagreement, those are all things that even the successful things had to do, new entrants have to do what the old firms had to do; they have to advertise, raise market share, etc. · BTE=information, old firms BTE have a reputation which is hard to imitate because consumers can’t be sure o World of information costs, there are always barriers. · Stigler matches Armentano—must match consumer benefit o Consumers prefer older firms because they have proven to last, people voluntarily buy from who they like better

· Are property rights BTE? YES, you can decide to do things with your property without permission but others have to ask o This is bad because property rights create INCENTIVES to do certain things. · Copyright and patent laws, BTE? YES. Reduces competition in existing products but gives incentives for innovations! · You can have too broad (the word “the”) or too narrow of property rights · Barriers to theft—good, there are times when we think barriers are a good thing · You may want to restrict one form of competition if it gave people incentives to INNOVATE o Old people and prescription drugs—old people want lower price and low incentive to innovate (lowers ROR on existing drugs) but younger people want higher prices to increase incentives to innovate.

· Property rights, I can do w/o permission but other people need permission to use your stuff · Who has the permission to do something without additional agreement from others · Copyright, patent law o You can have too broad (the word “the” or the birthday song which is why restaurants sing the song differently) or too narrow of property rights that doesn’t stop people from doing anything Disagreement based on age—prescription drugs.

· Property rights determine incentives which determine behavior · How they determine property rights? They move backwards from what kind of behavior/outcomes you want

· ALL LEGITIMATE USES OF RESOURCES · If you have resources isn’t spending more on capital equipment is a legitimately use of resources that you already own o We want everyone to do those things without permission to do those things · However anti-trust forces you to ask permission to do this stuff · Assume there are economies of scale, if you restrict investment in capital, you restrict firms from passing on lower costs o Example, nation wide advertising o Would we be better or worse of restricting those things if there are economies—advertising, etc. § Bigger BARRIER if we do this · Example, it used to be illegal to advertise the price of eyeglasses o Existing eyeglass producers wanted to do this because they wanted to keep their existing clientele preventing competitors from advertising their ONE advantage (new producer’s only advantage is price because older producers have reputation advantages) REAL BARRIER IS THE RESTRICTION TO THESE THINGS.

THIS IS PURE CONJECTURE: Because you can advertise your information as well as advertise your reputation to people that may not be familiar with you.

· Only where things like goodwill and brand loyalty are valuable this only happens when information costs are high · You want to inform them of alternatives they weren’t aware of before · If you’re aware of a firms history, you know information about them · Existing people can depends on existing clientele, but new firms need to advertise to let them know they exist o If you restrict advertising, you hurt consumers because new people cant come in. · In a world of uncertainty, you don’t know who’d satisfy what · A lot of new entrants come from conglomerates because they can use the reputation earned elsewhere · Predictors of who will serve me best—longevity, reputation, etc. Advertising tells consumers you exist at a lower cost for customers to find out and tell people about your hours, etc. o If you restrict advertising, it hurts new firms more

· Advertising is only a BTE if its done well · Restriction on advertising is a bigger BTE to new firms in an industry

· Costs are higher for new entrant to borrow funds. From perspective of new entrant its “unfair” barrier · In a profit seeking enterprise, a bank would lend to someone cheaper only if that person is LESS RISKY which gets capitalized in lower interest rates

· Large existing firms have advantage because of reputation. · If there were diseconomies of scale, smaller firms would have lower cost of production and they’d be better than larger firm. · Their lower costs can level out with the no reputation o However, if there are economies of scale, small firms don’t have the repuation or economies of scale. · Relatively small firms can enter to offset their disadvantage of no reputation if there are diseconomies of scale

· Brand name tells you the identity of who makes it and tells you the reputation of who makes it · If you license, the value of your reputation diminishes so the quality guarantees disappear in this case. o You would have no incentive to advertise in the future o Reduces the value of existing reputation for what gain…it would “lower the price” but it would reduce incentives to create new brands